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Rail rate hike faces hurdles
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February 9, 2000: 4:16 p.m. ET
Fuel and labor costs soar but service problems, contracts blocking increase
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - Lingering service problems and a looming regulatory battle could hamper eastern railroads' efforts to win higher rates from customers at this time of rising fuel and labor costs.
CSX Corp. and Norfolk Southern Corp. officials say they are seeking rate increases of between 2 and 4 percent, although they say it is only from select customers and not across the board. They point to an industry benchmark that shows a 4.7 percent increase in costs in the first quarter, compared to a year ago, as justification for the rates.
But both railroads admit they are still working to solve service problems due to their attempts to integrate the former Conrail system into their networks since June 1, 1999, although they say those problems should not be a factor in discussion of future rates.
"I empathize with people how they feel, how they were affected. But it is not our expectation that they'll have inferior service throughout the year," said John Sammon, vice president of the merchandise service group for CSX Transportation, the railroad unit of CSX Corp. (CSX: Research, Estimates).
Customers balking at rate rises
But industry observers and officials say many customers are objecting to increases as long as service problems remain. And customer acceptance could be complicated by the eastern railroads seeking support from those same customers at this moment to fight the proposed merger between Burlington Northern Santa Fe Corp. (BNI: Research, Estimates) and Canadian National Railway (CNI: Research, Estimates). That issue is about to go before regulators.
"Right now, the timing of this is difficult," said Doug Rockel, analyst with ING Barings. "There's no doubt a price increase of this magnitude would be justified by the costs. But it's not what the shipping community is willing to hear right now."
 Fuel spikes are not hitting the relatively fuel-efficient railroads as hard as other modes of transportation, such as trucks or airlines. Fuel equaled only 6.2 percent of railroad revenue in 1998, the last year for which industry statistics are available.
Wage and benefit costs are also up about 5 percent this year across the industry because of labor pacts that expire this year, and labor was 35.3 percent of rail revenue in 1998.
An official with a major intermodal marketing company, which arranges to put containers of freight on railroads for a number of customers, say his customers might be willing to pay more to BNSF, where service is fairly good, but they won't agree to pay more to CSX or NS.
"I called one of the (eastern railroads) last week, and the conversation began with me saying, 'Have you lost your mind?'" said the IMC official, who spoke on the condition his name not be used. "It's a little difficult to sell this to our customers. They say they (the railroads) didn't earn it."
Many seeing rate cuts, not hikes
But while rates for the intermodal freight are going up, most CSX and NS customers aren't facing rate increases right now. A survey of CSX and Norfolk Southern customers in December for a major trade group of rail shippers shows about half of customers will see the same rates from the two railroads this year as they did last year.
As for the rest, almost as many are seeing rates decrease as are seeing increases, and the average decrease in rates is larger than the average increase.
"I talked to several people smiling when they came out of rate negotiations," said Ed Rastatter, director of policy for the National Industrial Transportation League, whose members are major rail and truck customers.
Some won decreases because they were former Conrail customers who now have a choice of railroads for the first time. Other have had long-term contracts expire and, because of continual rail rate decreases in recent years, the market price is actually lower today than it used to be, said Rockel.
Rockel says his and most other analysts' models are for a 1 percent increase in rail rates this year. That's not bad after numerous years of seeing rail rates decline, he said, but it's not in the range of recent reports on the industry. And it's not necessarily out of line with what the railroads are expecting to win. CSX is looking at a 4 percent increase in revenue on a pro forma basis this year, but that is mostly due to a 3 percent projected increase in volume.
Norfolk Southern officials wouldn't release revenue projections for the year, but they admit that the rate hikes they're seeking are selective.
"We're not applying any increases across the board," said Susan Terpay, spokeswoman for the railroad. "We determine our pricing based on factors like demand, capacity and fleet availability."
A new look at long-term contracts
Part of the problem for the railroads is that about 60 percent of rail freight is moved under long-term contract and not subject to immediate rate increases. The large use of long-term contracts is something that John Snow, the chairman and chief executive of CSX, would like to see end.
"In a condition of substantial excess capacity, which characterized the industry for really most of the last 20 years since deregulation ... contracts made a lot of sense. You wanted to fill that pipeline up," he told analysts during a recent conference call. "But now the pipeline is pretty well filled up. Demand is very strong. A lot of car types are tight. So, I think what you are going to find happening with us is that we will be moving away from contracts as the predominant way to engage the shippers."
But while other railroads are saying they're seeing tighter capacity, they're not talking of moving away from contracts.
Officials with the railroads opposed to the BNSF-CN deal say their appeal to customers in that fight won't stop them from seeking higher rates.
"One is a day to day business operation issue, the other is a state of the railroad industry issue," said Mark Davis, spokesman for Union Pacific Railroad, a unit of Union Pacific Corp. (UNP: Research, Estimates). 
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